Issue No. 13367

 

GIVING the new Pasok government its first vote of confidence on December 1, top eurozone officials allayed fears over the country’s bankruptcy which had fuelled speculation against Greek bonds.

 

 Eurogroup President Jean-Claude Juncker said that Greece’s default is out of the question, expressing confidence the new socialist government would rein in spending and borrowing.

“There is no hint of bankruptcy as far as Greece is concerned,” Juncker told a news conference after the regular monthly meeting of eurozone finance ministers in Brussels.

 

However, he added that “the situation in Greece is rather worrying”.

 

 

According to forecasts of the EU’s executive body, the European Commission, Greek debt will reach 124.9 percent of GDP next year, becoming the highest ratio in the 16-nation eurozone.

 

This makes it increasingly expensive for Greece to tap financial markets as the fear of bankruptcy would discourage banks from holding Greek government bonds. Consequently, Greece faced a rising cost of selling bonds in recent weeks, compared to other countries that use the euro currency, reflecting investor concern.

 

However, given that Greece is a member of the eurozone, a default like that of Iceland would risk bringing down the whole euro edifice. Hence, an official assurance implying that the European Central Bank would act as lender of the last resort, which calmed market worries about the risk attached to Greek bond issues.

 

“I can assure you that neither Italian nor other banks have reason to worry about Greek government bonds,” Finance Minister Yiorgos Papakonstantinou told a news conference during the Eurogroup meeting. “Any scenarios having to do with instability in the Greek economy are completely unfounded.” 

 

His remarks echoed a statement from rating agency Moody’s, which said investors’ recent concerns that the Greek government was facing a liquidity crunch were unjustified.

 

 

Consequently, the bond markets calmed down on December 2 as the premium on the demand to hold 10-year Greek government bonds rather than benchmark German Bunds fell to its lowest in two weeks, easing to 167 basis points, from 217 basis points on November 27.

 

Papakonstantinou briefed the Eurogroup about the fiscal targets and reforms he planned to implement in the coming months. They include cutting the budget deficit to 9.1 percent of gross domestic product in 2010 from this year’s expected 12.7 percent. 

 

The eurozone chiefs said Greece may need more drastic measures to attain those targets. “We recognise that further measures are still required,” Juncker said.

 

European Commissioner for Economic and Monetary Affairs Joaquin Almunia said: “The (Greek) minister does not exclude a supplementary budget if needed.”

 

Almunia said the commission would first examine Greece’s updated three-year stability and growth programme in February before giving the country a new deadline for cutting its budget deficit below the EU’s ceiling of 3 percent of GDP. This follows signs the current deadline of 2011 will not be met.

 

Papakonstantinou told reporters in Brussels that he had agreed to present fellow EU ministers with a more detailed plan in January to improve Greece’s fiscal position, including measures to widen the base of taxpayers by combating tax evasion, finance pension fund debts and reduce government expenditures.

 

 

“It will be the same kind of timetable that other countries, starting from similar positions, have. We do not want special treatment,” Papakonstantinou said.

 

Many other EU countries received deadlines of between 2012 and 2015 for cutting their budget gaps to beneath the level outlined in the Stability and Growth Pact, as proposed by the European Commission in November under EU budget rules.

 

Papakonstantinou said the “Greek problem was mainly a problem of policies implemented by the previous government” and stressed that the EU finance ministers’ decision to proceed with the next step of disciplinary procedures involving tighter EU supervision against Greece for its excessive deficits was “a clear line dividing the past and the future”, adding that the future “will be judged based on decisions taken by the current government and will be recorded not only in the 2010 state budget but mainly in an updated stability and growth programme to be submitted to the European Commission in January”.

 

Asked about the rumours of new government borrowing, Papakonstantinou said Greece had no plan to sell bonds to China, as reported by local press.

 

“There is no such plan in the works. At the same time, it is very clear that, like every country, we are looking at any possible diversification regarding our borrowing needs,” he said. 

ATHENS NEWS 30/08/2010, page: 6